Pyxus International, Inc. (PYYX) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to today's Pyxus International, Inc. Fiscal Year 2022 Conference Call. [Operator Instructions]. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Tomas Grigera, Treasurer. Mr. Grigera, you may begin your conference.

Thank you, Elaine. With me today is Pieter Sikkel, our President and CEO; and Flavia Landsberg, our CFO. Before we begin discussing our financial results, I would like to cover a few points. You may hear statements during the course of this call that express a belief, expectation or intention as well as those that are not historical fact. These statements are forward-looking and involve a number of risks and uncertainties that may cause actual events and results to differ materially from these forward-looking statements. These risks and uncertainties are described in detail, along with other risks and uncertainties in our filings with the SEC, including our most recent Form 10-K. We do not undertake to update any forward-looking statements made on this conference call to reflect any change in management's expectations or any change in assumptions or circumstances on which these statements are based. Included in our call today may be discussion on non-GAAP financial measurements, including earnings before interest, taxes, depreciation and amortization, commonly referred to as EBITDA and adjusted EBITDA that are not measures of results of operations under generally accepted accounting principles in the United States and should not be considered as an alternative to U.S. GAAP measurements. A table, including a reconciliation of and other disclosures regarding these non-GAAP financial measures is available on our website at www.pyxus.com. Connection with the emergence from Chapter 11 cases in August 2020, Pyxus qualified for fresh start reporting as detailed in our Form 10-Q and Form 10-K reports filed with the SEC. And due to the application of fresh start reporting the preemergence and post-emergence periods may not be comparable. Replay, rebroadcast, transcript or other reproduction of this conference call, other than the replay as provided by Pyxus International, has not been authorized and is strictly prohibited. Investors should be aware that any unauthorized reproduction of this conference call may not be an accurate reflection of its contents. Now I'll hand the call over to Peter.

Hello, everyone, and thank you for joining us this morning. I'm proud of the progress made by the business during fiscal year 2022. Our employees work diligently to increase volumes and revenue compared to the prior year. They achieved this while continuing to navigate global challenges that largely stem from the ongoing impacts of COVID-19 and the unfortunate events in Ukraine. We continue to expand our business relationships as customers sought solutions to reduce supply chain complexities and improve operational efficiency. Expansion of these relationships increased our market share in Africa, Asia and South America and contributed to a 16.8% increase in kilo volume compared to last year. This growth is partially attributable to our environmental, social and governance framework, which we publicly announced in December 2021. Our efforts to execute on our strategy to increase financing sources and working capital lines globally resulted in a new asset-based lending credit facility with PNC Bank executed in February 2022. This facility provides the company with an extended maturity date, reduce costs and increase potential borrowing availability. In addition, in June 2022, we entered into an agreement to amend our delayed draw term loan facility. This amendment provides the company with an extended maturity date, reduce costs and increase financial flexibility. In January 2022, we completed the exit of our cash flow negative cannabinoid operations. Restructuring activities generated savings in SG&A, which contributed to a $55.9 million decrease in expense compared to last year. As a result, our SG&A expense has normalized and is consistent with levels prior to our investments to develop those businesses. For fiscal year 2023, we anticipate increased demand for our leaf products, the continuation of COVID-related logistical challenges and cost and price increases due to inflation. We expect fiscal 2023 sales to be between $1.75 billion and $1.95 billion, and adjusted EBITDA to be between $130 million and $160 million. Maintaining farmer livelihoods and the supply chain of responsibly-sourced sustainable and traceable products remains a top priority as we engage with customers about the impact of inflation on the cost and price of tobacco going forward. Additionally, we have taken proactive measures to secure inputs, such as fertilizer and fuel, for the next year, allowing us to remain focused on delivering stakeholder value as we work to grow a better world. With that, I'll turn it over to Flavia to provide a financial update. Flavia?

Thank you, Peter. With regards to our full year results, sales and other operating revenues for the year ended March 31, 2022 were $1.64 billion, a 23.1% increase compared to the prior year. This increase was due to a 16.8% increase in kilo volume and a 7.5% increase in average price per kilo. The 16.8% increase in kilo volume was driven by a larger crop sizes in Africa and increased market share in Africa, Asia and South America, partially due to customers reversing their vertical integration in certain markets. In addition, 21.1 million kilos or $178.3 million of shipments were delayed by the COVID-19 pandemic and customer shipping instructions from prior year into the current year and were offset by similar volume of shipments expected in the current year that has been delayed into the next year in Africa, North America and South America. The 7.5% increase in average price per kilo was primarily due to product mix, having a higher concentration of lamina in Asia, Africa and Europe as well as a customer and grade mix in Africa and North America. Cost of goods and services sold for the year ended March 31, 2022 were $1.41 billion, a 20.7% increase compared to prior year. This increase was driven by the increase in sales and operating revenues. Average cost per kilo increased primarily due to the higher tobacco prices. Gross profit as a percentage of sales increased to 13.8% for the year-end March 31, 2022 compared to 12.1% in the prior year. This increase was mainly due to the deconsolidation of the company's Canadian Cannabis Subsidiaries in the fourth quarter of fiscal 2021, the wind down of the industrial hemp and the CBD businesses and customer service -- and customer mix. Average gross profit per kilo increased primarily due to the customer mix. SG&A expenses were $142 million, a 28.2% decrease compared to the prior year. SG&A expenses as a percent of sales decreased to 8.7% for the year-end ended March 31, 2022 compared to 14.9% in the prior year. These decreases were related to increasing sales and other operating revenues, the deconsolidation of the Canadian Cannabis Subsidiaries in the fourth quarter of year ended March 31, 2021, and savings from restructuring initiatives. The company's liquidity requirements are affected by various factors, including crop seasonality, foreign currency and interest rates, green tobacco prices, customer mix, crop size and quality, and legal and professional costs. At the year-end, the company's availability credit lines and cash totaled $500.9 million, including $287.2 million of availability under foreign seasonal lines of credit. Cash, cash equivalents and restricted cash were $200.9 million, a $103.6 million increase compared to the prior year due to the higher net proceeds from short-term borrowings and higher collections of beneficial interest on securitized trade receivables. Trade and other receivables net were $260.2 million, a $56.4 million increase compared to the prior year due to the primary from the increase in sales. Net inventories were $749.9 million, a $21.1 million increase compared to the prior year due to the higher green tobacco prices in South America and was partially offset by the restructuring of certain African operations in the prior year where the company no longer operates. As of March 31, 2022, 91.2% of the company's processed tobacco inventory is committed to specific customers to meet near-term forecast demand. Advances from customers were $53 million, a $40.9 million increase compared to the prior year due to the increased prepayments from certain customers for inventory purchases to be made next year. Current portion of the long-term debt were $107.9 million, a $105.8 million increase compared to the prior year due to the reclassification of the DDTL facility from long-term debt to current portion of long-term debt during the year ended March 31, 2022. Now I would like to turn the call back over to Peter for some closing remarks.

Thank you for that update, Flavia. We're excited about the progress in the future of our business. And on that note, operator, please open the line for questions.

[Operator Instructions] We will take our first question from Chapin Mechem from Northeast Investors.

I just wondered if you could expand a little bit on the shipping delays. I know we've been talking about it for the last 1 year or 2. But I'm just kind of wondering if you can give any more color on that.

Yes. I mean I think that's a continued feature of the business, and I guess not just us, but everybody is -- every company around the world, supply chain inefficiencies continue to occur. So we carried over a similar volumes of shipments from this last fiscal into this fiscal as we did the previous year into this year. And the majority of those came from South America, which has seen significant logistical challenges in terms of getting containers. And then from Africa and North America, mainly into Asia, where we've seen various other procedural issues related to getting shipments done. But we did see some relief, some improvements as we reach the end of quarter 4. Certainly, shipments coming out of Asia, we saw significant improvement as we went through the last quarter. And hopefully, that will continue throughout the next fiscal year.

Great. And so I guess for your guidance for EBITDA for '23, is that -- assuming that, that -- I think it's about $170 million makeup? Or do you -- or is that not included in there?

We don't have a full catch up as we're looking forward. We're expecting logistical challenges to continue for the coming year. I think we saw a strong year in terms of volume growth. I think our teams performed very well in terms of getting shipments out despite those challenges. That's what we're focusing on as we go forward. But of course, there are a multitude of factors coming into the coming year. There's very strong demand for leaf tobacco. There is very high inflation in certain origins. So there's significant cost and pricing increases going to customers. And there's also a relatively small crop sizes, particularly across the Southern Hemisphere related to the La Nina weather effects of the growing season. So we're in a situation of strong demand, and we're very much focused on acquiring the volumes that we need to as best we can satisfy that demand.

If I may add on related to the guidance. The way the guidance we put together is a couple of important points. I think the first one is, the underperforming nonleased business either be restructured or sold. So that's one piece. The second thing is our SG&A expenses are expected to increase below inflation rates. Okay. Then, as Pieter said, the smaller crops in some regions, like South America and Africa, will be offset by increasing purchases in other areas. Other piece that the increase in blue leaf prices is expected to pass on. And we are very advanced on purchasing, and we prepare actually with additional seasonal lines to absorb their price increase is an important piece. The growth will come from increase in vertical integration strategy and also the additional volumes of value-added products due to the additional capacity implemented last year. Hope that give you a little more color into the guidance.

[Operator Instructions]. This concludes -- we have a question from Craig Carlozzi from Longfellow.

I appreciate the 2023 guidance in particular, some of the backdrop and underlying drivers. Given all the moving pieces of the business, would you be able to give us any directional color or expectations on what we should expect for CFO minus CFI. I know SG&A is back to what you claim to be a normalized level. Inventories are inflated. It sounds like there's going to be some improvement. But given that we're starting from a high working capital base, what are your expectations? Is it reasonable to believe that, that number could be positive this year? It's been quite some time. Just curious what your thoughts are.

You're talking about cash flow, right?

Yes. Yes. Specifically, the CFO...

As you can see -- yes, that's -- we're not going to put anything forward related to that. But what you can see that we added on Page 8 of our press release, okay, you can see that at the bottom, okay, we added some information on the cash flow and the trend will continue, okay? And you can -- as you can see, actually, the cash flow generated in 2022 is about $99.5 million. And much stronger cash flow generation versus 2021 and versus 2020. So we expect the trend to continue. And that's part of the transformation that we're doing in the business to have -- continue to have a strong cash generation. And as you know, we are in the volume business, we are in the margin business, and the idea is to continue to trend upwards.

Okay. What about asked a different way directionally for net debt at year-end. I'm just -- what I'm trying to understand is if there's anything that is not -- and I am looking at Page 8, and I do appreciate the different color. I did notice it. And as always, I think everybody on the call appreciates the breakout. Is there anything else that we should be aware of? If we were to think about net debt year-over-year from the 2/31/22 to 3/31/23, is there any color or guidance, even soft expectations up, down materially the direction, anything there?

Again, we're not going to release any projections related to that. But that being said, as you can see in the trend, our debt has been -- the cost of our debt has been going down, and we expect that to continue to happen, right? We have been both on seasonal lines and the ABL line were able to lower the cost over 100 basis points. And so one interesting piece is the raising interest expense. As of now, we had no impact on that in our numbers and mainly because of the floor that is higher than interest rates. To the future, interest rates will go -- depending on what's happening, our interest costs may go up because of the raise in the interest costs, but we're also working very hard on actually increasing the value and the number of the seasonal lines and the costs. So we should expect that to happen. That being said, we are growing, and we expect to purchase more in the coming fiscal year, what may need additional seasonal lines. And we did [indiscernible] the DDTL at lower cost.

What was the interest savings on that again? I know I looked at it. I just [indiscernible].

Well, it's a combination. We have the 8-K that you should refer back to.

We will take our next question from Manish Garg from Wells Fargo.

Thanks for the guidance very helpful. Can you talk a little bit about what growth opportunities you guys are seeing in the future here from either customers or from any of your geographies?

I'm sorry, what was the last couple of words?

Just what -- just generally, what are the growth opportunities you are seeing across the business?

Okay. Thank you. Well, I think -- firstly, I mean, we had a very significant growth in volume in fiscal '22 compared to prior year. And really, that reflects a lot of what we've been working on for many years. What we're going to start to see as we go into '23, we're going to see the full year effects of the various of the reversal of vertical integration opportunities that we managed to implement last year and coming into this year. I think that will steadily increase in volumes as crop sizes rebound. They're a little bit low this year, but we'll start to see improvements in that. We'll see steady opportunities out there. We've seen strong progress in market share growth across several regions actually and several geographies within those regions. So I really think customers are excited about what we provide and how we provide it. Our ESG programs all the way from the field through the farmer are extremely strong, and I think that's been acknowledged in what we do. And we see significant potential still in the various value-added businesses that we are involved in. We did increase capacity over the last year. And we're starting to see -- well, as we get into '23, we'll see more of a full year run rate on that increase in capacity as well. So there are significant opportunities in various areas of the leaf business that we see as we go forward. And with that volume, we've got to keep focus as well on profitability. We're not quite at the profitability levels in every region that we would expect, and that's what we're going to continue to target as we go forward to improve on that.

This concludes today's question-and-answer session. I would like to turn the call back over to Tomas Grigera.

Thank you, for joining our call today. The call will remain available for playback for any interested person through 8:00 p.m. on Sunday, July 4. Again, thank you for participating in our conference call.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.